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Multiple Choice: Exchange rate

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1) Currently, \$1 will buy C\$1.36 while \$1.10 will buy ?1. What is the exchange rate between the Canadian dollar and the euro?

A. C\$1 = ?1.10
B. C\$1 = ?.9091
C. C\$1 = ?1.2364
D. C\$1.36 = ?1.10
E. C\$1.36 = ?.9091

2) Assume that you can buy 245 Canadian dollars with 100 British pounds. How much profit can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S. dollars?

Country---------U.S. \$ Equivalent----------Currency per U.S. \$
U.K.-----------------1.8305---------------------------?

A. \$0.86
B. \$0.93
C. \$1.09
D. \$1.37
E. \$1.55

3) In the spot market, \$1 is currently equal to A\$1.42. The expected inflation rate is 3 percent in Australia and 2 percent in the U.S.. What is the expected exchange rate one year from now if relative purchasing power parity exists?

A. A\$1.4058
B. A\$1.4062
C. A\$1.4286
D. A\$1.4342
E. A\$1.4484

4) You are expecting a payment of C\$100,000 four years from now. The risk-free rate of return is 3 percent in the U.S. and 4 percent in Canada. The inflation rate is 3 percent in the U.S. and 2 percent in Canada. The current exchange rate is C\$1 = \$.72. How much will the payment four years from now be worth in U.S. dollars?

A. \$68,887
B. \$69,191
C. \$69,300
D. \$72,222
E. \$74,953

5) Which of the following statements are correct concerning the foreign exchange market?

I. The trading floor of the foreign exchange market is located in London, England.
II. The foreign exchange market is the world's largest financial market.
III. The four primary currencies that are traded in the foreign exchange market are the U.S. dollar, the British pound, the Canadian dollar, and the euro.
IV. Importers and exporters are key players in the foreign exchange market.

A. I and III only
B. II and IV only
C. I and II only
D. III and IV only
E. I and IV only

Solution Preview

1) Currently, \$1 will buy C\$1.36 while \$1.10 will buy ?1. What is the exchange rate between the Canadian dollar and the euro?

A. C\$1 = ?1.10
B. C\$1 = ?.9091
C. C\$1 = ?1.2364
D. C\$1.36 = ?1.10
E. C\$1.36 = ?.9091

\$1.1= ? 1
Therefore \$1 = ? 0.9091

\$1= C\$ 1.36
Therefore C\$ 1.36= ? 0.9091

2) Assume that you can buy 245 Canadian dollars with 100 British pounds. How much profit can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S. dollars?

Country---------U.S. \$ Equivalent----------Currency per U.S. \$
U.K.-----------------1.8305---------------------------?

A. \$0.86
B. \$0.93
C. \$1.09
D. \$1.37
E. \$1.55